Has your organization been thinking about incentivizing donors, volunteers, attendees, etc. through some sort of prize giveaway? A little bit of planning in this arena can avoid conducting what turns out to be an illegal lottery or sweepstakes. A “lottery” is prohibited under federal law and in all 50 states. In order to be considered a lottery, 3 elements must be present – prize, chance, and consideration. In order for a planned activity to escape characterization as a lottery, one of those elements must be missing. The following is a discussion of each of those three elements.
A prize can be anything of value (monetary or nonmonetary) that in excess of what is provided to every purchaser, donor, attendee, etc.
Chance is an element of the lottery when the prizewinner is chosen at random (i.e., from a random drawing).
One way to avoid the element of chance is to make the contest a “skill contest.” Essay, photo, and video contests in which the winner is chosen by qualified judges could qualify as a skills contest (and thus eliminate the chance element). The contest must be based on adequate objective standards made known to the contestants and also must be the criteria used by judges whose qualifications have reasonable relation to the purpose to be achieved. The criteria should be weighted, and that should be disclosed to participants in advance. The contest cannot be one in which an individual can win by guessing or through luck.
The consideration element may be met by either monetary (they have to pay an amount of money to enter or buy something) or nonmonetary (must exert a certain amount of effort to enter the promotion, even if it doesn’t require money).
The most obvious way to eliminate the consideration element would be to offer a free alternate method of entry. The free method must be clearly and conspicuously disclosed, and any entrants via the free method must be treated identically (in terms of their chance at winning) as the paying entrants. However, even with a free alternate entry method, there is still a risk that the required method will constitute consideration. For example, in some states, a requirement to visit a store is enough to constitute consideration. In other states, requiring attendance at a random drawing may be enough to constitute consideration.
Additional Miscellaneous Issues
Some states require registration and bonding requirements, depending on how the game is conducted and the size of the prize.
Different states require certain disclosures in the official rules (i.e., odds statement, disclosure of free entry method, prize value and descriptions, etc.).
There are instances in which these types of promotions can be limited to customers only (credit card companies are one example). In order to limit it to customers, the sweepstakes should be: (i) open only to those who are customers prior to the first date of the promotion, and (ii) the sweepstakes should not be promoted until after the start date (otherwise, non-customers may be induced to become customers in order to participate in a promotion – thereby resulting in consideration being paid).
State law varies on many of the above issues (and other issues that may come into play that were not discussed). This summary was meant as only as a general guideline and not for state-specific advice. Please consult with a qualified professional if your organization is planning an activity that may be characterized as a lottery or sweepstakes.